Producers near victory on oil exports

1of 2Wells like these in Texas' Eagle Ford shale typically produce a lighter grade crude that may be suitable for shipment to overseas refineries under a congressional budget deal that would lift a 40-year-old ban on U.S. oil exports. (Houston Chronicle photo)Photo: Gary Coronado, Staff

2of 2The White House said President Barack Obama will sign a congressional budget deal despite reservations about some provisions, including one lifting a 40-year-old ban on U.S. crude exports. (AP photo)Photo: Saul Loeb, POOL

The end of U.S. oil's four-decade isolation from global markets was in sight Wednesday, as congressional leaders negotiated a $1.1 trillion spending deal that included a provision to lift the ban on sending American crude abroad.

Allowing exports would be a major victory for oil producers, although the industry's ongoing price slump would delay the benefits.

Producers, including ConocoPhillips, Anadarko, Apache and other major Houston-area companies, have pushed to lift export restrictions in hopes of reaching more lucrative markets for the flood of crude they've drawn from U.S. shale production in Texas and elsewhere.

The resumption of U.S. crude exports could be a boon to the Houston economy when oil prices begin to climb again. The area's Ship Channel and pipeline terminals are the main link between U.S. oil fields and the international markets, and allowing exports could open a new business in transporting and storing the oil on its way overseas.

"This is the first piece of good news that the energy industry has had in 18 months," said Patrick Jankowski, an economist at the Greater Houston Partnership.

Congress could vote on the measure by the weekend, and a White House spokesman said President Barack Obama will sign it despite reservations about some components, including lifting the export ban. Many environmentalists argued that lifting the ban would promote fossil fuels that contribute to climate change, and Democrats agreed to the measure partly in exchange for an extension of tax credits that benefit wind and solar power.

Won't ease global oversupply

Crude prices have fallen from $100 a barrel to less than $40 since the summer of 2014, a swoon that has resulted in tens of thousands of job cuts and several dozen oil company bankruptcies. An end to the U.S. export ban wouldn't ease the global oversupply that led to the downturn, but would give U.S. producers access to new customers.

Texas refineries, however, would lose a price advantage that the export ban provided. Many refiners had earned higher profits recently thanks to the gap in prices between cheap U.S. oil and more expensive global crudes. Refineries bought cheap domestic oil, and sold refined products - which aren't subject to the export ban - into higher-priced fuel markets abroad.

If the restrictions on the flow of U.S. oil to markets abroad are lifted, the gap between domestic and international prices should narrow and the windfall refineries have enjoyed could shrink, said Patrick DeHaan, a senior petroleum analyst for GasBuddy.

"It will hurt pure refiners," he said, referring to companies that don't integrate oil production or retail sales into their business. "They'll be slightly less competitive."

The Houston area has more than one-fourth of the nation's total refining capacity.

The oversupplied market already had reduced the premium on international oil from as much as $10 a barrel in March to near parity with U.S. blends, said John Auers of consulting group Turner Mason & Co.

"There isn't a domestic discount right now," he said, and that means the end of the export ban will play out over a longer term.

Oil markets in both the U.S. and abroad are flooded with too much oil, and allowing free movement between them won't do much of anything to prices.

On Wednesday, U.S. benchmark West Texas Intermediate crude fell $1.83 to $35.52 per barrel, its lowest price in almost seven years, and international Brent lost $1.26 to $37.19.

The $1.67 gap between the two benchmark crudes is less than the $2.50-$3 per barrel it costs to send U.S. oil across the Atlantic, meaning that shipping oil from the U.S. isn't a money-maker even if it's allowed, said Tim Evans, a commodities expert at Citi Futures.

U.S. production falls

In fact, Evans said, U.S. production is falling and imports of crude have risen recently to 8.3 million barrels per day, the highest level since September 2013.

That could change quickly if prices rise.

In the meantime, the only types of oil likely to be exported are ones that aren't a good match for U.S. refineries.

Most U.S. plants are geared to handle heavy grades of crude imported from Saudi Arabia and Venezuela - a legacy of the decades of declining U.S. production that also brought about the export ban in the 1970s.

The oil produced in shale plays like the Eagle Ford and Bakken is lighter, less viscous and doesn't require as much refining as the heavier grades. It's suitable for refineries in Mexico and Europe, which will be the most likely customers if the U.S. lifts the export ban.

"In theory there are a lot of adjustments that could be made," Evans said. "But if the economics don't work, no barrels are going to move."

A 'niche market'

Houston pipeline company Enterprise Products Partners and a handful of other oil and gas logistics companies already export a lightly refined oil called condensate, under authority granted when U.S. regulators tweaked the export rules slightly in the summer of 2014.

The Eagle Ford yields large quantities of condensate, much of it too light for U.S. refineries.

This year, condensate shipments have averaged about 100,000 barrels a day, according to figures from ClipperData, a company that tracks global oil movement. That's about one-third of the 350,000 barrels per day the U.S. sends to Canada through another loophole in the export ban.

"It's a very niche market," said ClipperData's Matt Smith.

But if the economics were attractive and Congress opened the door to shipping all grades of oil, companies would be able to draw on the existing infrastructure to quickly ramp up shipments.

"The potential is there," Smith added.

Recovery years away

Most analysts are forecasting an eventual recovery in oil prices, though it could take another five years.

Jeff Dietert, of Houston energy investment bank Simmons & Company International, said that when higher prices do return, freedom to export oil will mean more investment flowing into U.S. shale than before.

Shale drillers are competing against drillers in Russia and Saudi Arabia, he said. In the past, they've been handicapped by the export ban that prevented them from selling to buyers in international markets.

"The new investment will disproportionately be made in the U.S.," Dietert said, "This is positive for the U.S. energy industry, positive for Texas and positive for Houston."